Although the soft-drink giant Coca-Cola (NYSE:KO) earned an unfortunate reputation as a boring investment, it now makes an attractive case. With multiple twists and turns in the economic and geopolitical landscape, KO stock provides a measure of stability. Conservative investors have long relied on its consistent dividends.
The issue, though, was that the KO stock price went range bound for several years. But in 2018, the shares finally made good on their upside potential. After hitting bottom around mid-May, the beverage-maker gained nearly 17%. Coca-Cola stock ended the year up almost 7%, becoming one of the few names that weathered last October’s market fallout.
Much of the enthusiasm centered on the company’s rebranding efforts. As millennials and later Generation Z emerged onto the scene, their health-centric behaviors dramatically changed the beverage market. Coca-Cola stock suffered while young consumers avoided carbonated, sugary drinks. To counter this trend, the company offered its own healthy alternatives, while face-lifting and spicing-up its traditional soft-drink portfolio.
Unlike earlier efforts, management finally generated momentum. Despite several fundamental headwinds — such as unfavorable currency fluctuations and the U.S.-China trade war — Coca-Cola generated surprising growth.
Was Q4 the Growth Story’s End?
It was a similar story for its most recent fourth-quarter 2018 earnings report. The company met its target for earnings per share at 43 cents, while its revenue haul of $7.06 billion beat the $7.03 billion consensus estimate. This time, though, the KO stock price took a beating following the report.
Wall Street didn’t care for the fact that management downgraded expectations for the full year 2019. Against a forecast calling for EPS of $2.22, Coca-Cola’s brass expects to “range from 1% below or above $2.08.”
On paper, Q4 spelled the end of the growth story. Does it also spell the end of Coca-Cola stock?
Soda isn’t Dead and Neither is Coca-Cola Stock
I don’t blame anyone from running away from KO stock. If you pay attention to industry news, you’ll find a consistent theme: young consumers don’t drink soda.
The main challenge is shifting consumer tastes, especially among the younger demographic. Indeed, Coca-Cola and Pepsi have both unintentionally catered to a surprisingly old demographic. According to a 2016 Adweek report, Coke was most popular among people aged 35-to-44 years. The largest consumer base for Pepsi featured the plus-65 crowd.
Sales stats indicate that Coca-Cola have moved the needle on demographics, especially with their slim, colorful Diet Coke packaging, That definitely helps in transitioning consumers back towards carbonated drinks.
Another important point is that premonitions about soft drinks may have been premature. A year ago, Food & Wine reported that Slice soda — a nineties phenomenon — is making a comeback. Another blast from the past, Jolt Cola, has also returned to retail shelves.
While it’s too early to say whether these product resurrections will succeed, their return bodes positively for Coca-Cola stock. Logically, we can deduce that their respective backers see a viable opportunity. After all, Jolt Cola runs the tagline, “All the sugar and twice the caffeine.”
That’s enough to make millennials run to their safe spaces! Yet here they are.
Moreover, I don’t think prospective buyers should assume that Slice and Jolt are isolated cases. Just recently, Coca-Cola announced that an orange-vanilla variant to their flagship brand. Yes, they’ll leverage their massive financial resources to market the hell out of it.
But they’re doing it for a reason: consumers still love soda, and that’s net positive for KO stock.
KO Stock is an Underappreciated China Opportunity
If the soda market’s potential resurgence wasn’t convincing enough, KO stock also has a viable, under-the-radar opportunity in China. Primarily, Coca-Cola can leverage its world-renown branding, something very few companies can boast.
Of course, branding alone won’t guarantee success in China. Fast-food icon McDonald’s (NYSE:MCD) has recently suffered frustrating spells in the world’s second-biggest economy. Additionally, McDonald’s and other American fast-food joints have found difficulty competing against local offerings.
This is where Coca-Cola’s much-criticized buyout of British coffee-shop chain Costa Coffee will likely benefit KO stock longer-term. Sure, management paid a hefty premium on Costa relative to what Starbucks (NASDAQ:SBUX) earns. However, Starbucks isn’t for sale.
More importantly, both Starbucks and Costa compete aggressively in China. This makes sense considering that upwardly mobile Chinese millennials have embraced a coffee culture. But again, Starbucks isn’t on the market. So the only way to effectively compete in the growing Chinese coffee market was through the Costa buyout; hence, the rich premium.
Broadly speaking, the bears are overreacting to the immediate soundbites, which naturally hurt the Coca-Cola stock price. But if you take a step back, you’ll see positive undercurrents. It just requires some patience for this narrative to play out.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.